Construction Accounting 101 for Contractors 2025

To illustrate, consider a construction company working on multiple bookkeeping for construction companies projects simultaneously. Job costing enables the company to track the financial progress of each project, identifying potential issues or successes early on. For instance, if a project is consistently over budget, the company can investigate the reasons behind the overspending and make adjustments to future estimates or project management strategies. The installment method is generally more suitable for construction projects with customer payments spread out over time by milestones.

Project-Based Operations

Technology Driven Approach – We use cutting-edge bookkeeping applications and tools contribution margin to increase productivity and provide instant insights into your financial data. Our streamlined payroll processing system guarantees precise and prompt payments for your personnel. We stick to a predefined payroll schedule, boosting worker happiness and morale by assuring timely payment of salaries. We perform a monthly bank statement reconciliation to ensure all your financial transactions are properly documented and accounted for.

What kind of accounting do construction companies use?

• Many construction contracts include retainage — also called retention — which is a percentage of the payment withheld for a specific period of time, often until the entire project is completed.
• The prevailing wage differs significantly based on the US state in question, and the amount changes every 6 months to a year.
• Additionally, a tax professional can help construction companies stay up-to-date with changing tax laws and regulations.
• Make sure you clearly define the payment schedule and any conditions for recognizing revenue based on progress payments.
• For instance, if a project is consistently over budget, the company can investigate the reasons behind the overspending and make adjustments to future estimates or project management strategies.
• Parties — the customer and contractor — have to agree ahead of time when control transfer happens (over time or at a specific point in time).

In these cases, there’s a risk that you won’t collect the full payment, so it’s wise to wait until you actually receive the payment to recognize it as income. You could have one account reserved for paying expenses, another one for managing payroll, and a third one for receiving payments for clients. It’s not uncommon for circumstances beyond your control to impact the price of materials, equipment, and labor costs. You need to record both direct and indirect costs if you want to track and spend efficiently. To ensure compliance, construction companies should consider hiring a tax professional or a bookkeeper who is knowledgeable in tax laws. A tax professional can help construction companies identify tax deductions and credits that they may be eligible for, which can help reduce their tax liability.

Track Labor and Material Costs Separately

Milestones see payments made after a significant stage of the project has been completed. This means that you won’t need to wait until the entire project is done in order to be paid by the client, which in turn improves the project’s cash flow. Another benefit is that milestone payments make identifying payment problems much easier. Familiarize yourself with contractor tax forms that are relevant to your business, such as Form 1099-NEC for nonemployee compensation and Form W-2 for employee wages. Gaining a thorough understanding of these forms and filing them accurately and timely is essential to stay compliant with tax regulations.

Understanding Construction Contracts and Billing

Pursuit intelligence allows you to forecast your project pipeline and make the best decisions possible to put forward a winning team. Since construction jobs are invoiced on a regular basis, it’s important to ensure that all invoices are tracked and accounted for. It’s not uncommon for firms to have multiple projects occurring at the same time, Catch Up Bookkeeping so tracking invoices ensures that nothing gets lost and falls through the cracks. Based on the project’s necessary job types and activities, you’ll be paying varying rates.

Tracking Costs Across Multiple Projects

Your construction business must use an accounting method for its bookkeeping and financial reporting. The main difference between the methods is the timing of recognizing revenues. For a lot of construction business owners, deciding whether to hire in-house bookkeepers or outsource their bookkeeping needs can be tricky. If you opt to keep control of this essential part of your organization, it is important to consider how much time you’ll need to manage that. Not merely a list of numbers, it encapsulates expense management, payroll processing, client invoicing, and bill payment.

A negotiated lump sum, on the other hand, might allow for some contingencies and unforeseen events. Billing a fixed-price contract often happens on a percentage-of-completion basis with retainage withheld. If there are any overruns because of changed site conditions or input costs, it falls on the contractor. Once a contractor does have a right to it, after satisfactory contract completion, the contractor issues an invoice for it and moves it from the asset account to the A/R account for collection. According to revenue standards, the contractor doesn’t have a current, unconditional right to the retainage portion of an invoice.

• Familiarize yourself with contractor tax forms that are relevant to your business, such as Form 1099-NEC for nonemployee compensation and Form W-2 for employee wages.
• Construction projects often include contract retainage, a percentage of the contract fees the customer withholds until the construction firm completes the project.
• This method is helpful because it allows the contractor to bill for the work as they go, especially when they have multiple ongoing projects.
• Equipped with these bank accounts, you can significantly increase the performance of your construction business.
• The act of withholding payment is called contract retainage and is part of a contract signed by the contractor and customer before the project’s implementation.
• There are a lot of rules and reporting requirements for construction companies.
• In summary, financial reporting and analysis are critical for construction companies to understand their financial position and make informed decisions.

As of December 2018, all companies reporting under GAAP need to follow ASC 606. And while private companies don’t have a formal obligation to use GAAP, many choose to follow its best practices. In comparison to other industries, like retail or manufacturing, construction contracting has several distinct traits from an accounting perspective. Caleb Woods is an experienced content specialist and an editor at Boom & Bucket, blending his journalism background with expertise in the heavy equipment industry.